What is a Roth IRA? Tax-Advantaged Retirement Savings, Explained

Congratulations! You’ve made the awesome decision to start planning for your retirement.

Still have questions? We’re here to answer them.

Here’s a quick explainer about what a Roth IRA is and how it works:

What’s a Roth IRA?

A Roth is a type of individual retirement account (IRA). It allows you to invest in stocks, bonds, mutual funds, certificates of deposit, ETFs and index funds, among other investments using the money you’ve already paid taxes on.

With a Roth IRA, you fund it with after-tax dollars, and your earnings and dividends grow tax free — which means you don’t have to pay taxes on the money you take out of your Roth IRA after 59 ½ (with some exceptions, this is the age you need to be to access it without penalty).

How much can I put in my Roth IRA in a year?

Roth IRAs have yearly contribution limits, meaning you can only put in $6,000. However, if you’re 50 or older, you can contribute $7,000.

When can I have access to all the money I invested in my Roth IRA?

There are no required distributions with a Roth IRA, meaning there’s no set date where you must withdraw the money after age 59 ½. If you’ve followed all the rules and the account has been open for five years or more, you can take out cash without paying taxes or penalties.

Your contributions within a Roth IRA can be withdrawn at any time, since you’ve already paid taxes on them. However, your earnings–the amount you’ve earned on your investments– would be subject to taxes and penalties if you are under 59 ½.

Investing, simplified

Start today with as little as $5

Why don’t I pay taxes on the earnings from my Roth IRA after 59 1/2?

Your Roth IRA is funded with your after-tax dollars. That means that you’ve already paid taxes on the money that you’ve contributed to your retirement account.

Interesting fact: There’s no age limit on when you can stop contributing to a Roth IRA.

Once you’ve funded the account, your earnings grow tax free.

With a Roth IRA, there’s no up-front tax benefit because you’re funding the account with the money you’ve already paid taxes on. But at age 59 1/2, the money is yours — because (you get it) you’ve already paid the taxes on it when you funded the account.

Um, I still don’t get why this part is important.

Having access to cash from a retirement account that you don’t have to pay taxes on can come in extremely handy.

Most of us will want to maximize income in our retirement years, when we’re likely to have scaled back on work or stopped working completely. Even our social security income will be subject to taxes. Having access to cash from a Roth that you don’t have to pay taxes on can come in extremely handy.

Does a Roth IRA offer other potential benefits?

Absolutely.

If you’re under the age 59 1/2, after five years, you can withdraw up to $10,000 for the purchase of a first home without paying any taxes or other financial penalties.

Similarly, you can make withdrawals for qualified educational expenses, and for medical and health insurance costs if you’re unemployed.

Interesting fact: There’s no age limit on when you can stop contributing to a Roth IRA.

Are there penalties I should be aware of?

Yes. While contributions within a Roth IRA can be withdrawn at any time, since you’ve already paid taxes on them, you may be subject to penalties and taxes on earnings withdrawn prior to age 59 ½, and for accounts open for less than five years.

So why it is called a Roth?

Good question! It’s named after William Roth, a senator from Delaware, who died in 2003. He helped sponsor the legislation that created these accounts in 1998.

As a final note, it’s always best to consult with a tax advisor or accountant for any questions you have about IRAs or 401(k)s.

Disclaimers

This material has been distributed for informational and educational purposes only, represents an assessment of the market environment as of the date of publication, is subject to change without notice, and is not intended as investment, legal, accounting, or tax advice or opinion. Stash assumes no obligation to provide notifications of changes in any factors that could affect the information provided. This information should not be relied upon by the reader as research or investment advice regarding any issuer or security in particular. The strategies discussed are strictly for illustrative and educational purposes and should not be construed as a recommendation to purchase or sell, or an offer to sell or a solicitation of an offer to buy any security. There is no guarantee that any strategies discussed will be effective.

Furthermore, the information presented does not take into consideration commissions, tax implications, or other transactional costs, which may significantly affect the economic consequences of a given strategy or investment decision. This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market. Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Before investing, please carefully consider your willingness to take on risk and your financial ability to afford investment losses when deciding how much individual security exposure to have in your investment portfolio.

Past performance does not guarantee future results. There is a potential for loss as well as gain in investing. Stash does not represent in any manner that the circumstances described herein will result in any particular outcome. While the data and analysis Stash uses from third party sources is believed to be reliable, Stash does not guarantee the accuracy of such information. Nothing in this article should be considered as a solicitation or offer, or recommendation, to buy or sell any particular security or investment product or to engage in any investment strategy. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. For more information please visit www.stashinvest.com/disclosures.

Stash Investments LLC ("Stash") is an SEC registered investment adviser. By using this website, you accept our Terms of Use and Privacy Policy. Stash’s investment advisory services are available only to residents of the United States in jurisdictions where Stash is registered. Nothing on this website should be considered an offer, solicitation of an offer, or advice to buy or sell securities. Past performance is no guarantee of future results. Any historical returns, expected returns or probability projections are hypothetical in nature and may not reflect actual future performance. Account holdings are for illustrative purposes only and are not investment recommendations. The content on this website is for informational purposes only and does not constitute a complete description of Stash’s investment advisory services. Certain investments are not suitable for all investors and are not available to all Stash Clients. A full list of available investments on Stash can be found here. Stash does not provide financial planning services to individual investors. Before investing, consider your investment objectives and Stash’s fees and applicable custodial fees. Stash Financial, Inc. is a digital financial services company offering financial products for U.S. based consumers. Deposit Product - (“Debit Account Services” provided by Green Dot Bank, Member FDIC). Advisory products and services are offered through Stash Investments LLC, an SEC-registered. Stash Capital LLC, an SEC registered broker-dealer and member FINRA/SIPC, serves as introducing broker for Stash Clients’ advisory accounts. Apex Clearing Corporation, a third-party SEC registered broker-dealer and member FINRA/SIPC, provides clearing and execution services and serves as qualified custodian for advisory assets of Stash Clients. Products offered by Stash Investments LLC and Stash Capital LLC are Not FDIC Insured, Not Bank Guaranteed, and May Lose Value. For more information, see our disclosures. All product and company names are trademarks™ or registered® trademarks of their respective holders. Use of them does not imply any affiliation with or endorsement by them.

*1 month equals 30 days from the date of account sign-up. Other fees may apply. Clients may incur ancillary fees charged by Stash and/or it’s custodian that are not included in the monthly Wrap-Fee.